Earnings Call: Q3 2018

Nov 1, 2018

Greetings, and welcome to the Floor and Decor Holdings Incorporated Third Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host today, Mr. Matt McConnell, Director of Investor Relations. Please proceed. Thank you, and good morning, everyone. Joining me on our call today are Tom Taylor, Chief Executive Officer and Trevor Lang, Executive Vice President and Chief Financial Officer. Also in the room is Lisa Laube, Executive Vice President and Chief Merchandising Officer, who will join us for the Q and A session. Before we get started, I would like to remind you of the company's Safe Harbor language. Comments made during this conference call and webcast contain forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to risks and uncertainties. Any statement that refers to expectations, projections or other characterizations of future events, including financial projections or future market conditions is a forward looking statement. The company's actual future results could differ materially from those expressed in such forward looking statements for any reason, including those listed in its SEC filings. Floor and Decor assumes no obligation to update any such forward looking statements. Please also note that past performance or market information is not a guarantee of future results. During this conference call, the company may discuss non GAAP financial measures as defined by SEC Regulation G. A reconciliation of these non GAAP measures to the most directly comparable GAAP financial measure can be found in the earnings press release, which is available on our Investor Relations website, ir. Flooranddecor.com. A recorded replay of this call, together with related materials, will be available on our Investor Relations website, ir. Flooranddecor.com. Now let me turn the call over to Tom. Thank you, Matt, and thanks to everyone joining our call today. Let me start by saying that I am very pleased with our Q3 results. We achieved total sales growth of 26.7% from the Q3 of 2017 to a record $435,900,000 Comparable store sales grew 11.1 percent on top of 13.5% growth last year and adjusted EPS grew 41% from the same period of fiscal 2017, all exceeding our expectations. Our Q3 results reflect the ongoing strength of our differentiated business model and compelling value proposition that continue to resonate with our consumers and pros. This further drives market share gains in the very fragmented $20,000,000,000 hard surface flooring industry. In the Q3, we opened 7 new stores, including 6 openings in new markets. We are excited about our openings in densely populated markets like Boston and our 2nd store in Seattle. In addition, we successfully rolled out our Pro Premier loyalty program company wide and are enthusiastic about the program's potential. Our team's focus gives me the confidence in our future. I believe at our current size, we are only a fraction of what we can ultimately achieve. And we have significant growth opportunities ahead of us. It's an exciting time here at Floor and Decor. I also want to thank our associates for all their hard work in serving our customers and communities. Now turning to the Q3 results. We continued our nearly decade long streak of double digit comp store sales growth. At the same time, we have been making substantial investments to support our growth. Despite these investments, we delivered 3rd quarter operating income growth of nearly 20% and adjusted diluted EPS growth of 41% from the Q3 of 2017. We are especially pleased to have exceeded our Q3 revenue and earnings outlook. This occurred during a period that was particularly difficult to forecast due to last year's unprecedented impact to 1 third of our stores by Hurricane Irma and Harvey. Our business during the 3rd quarter outside of the storm affected areas comped 10%. Looking to the future, we continue to see significant market share gain opportunities as we expand our footprint and build brand awareness. We will continue to invest in our connected customer, pro, designer and DIY strategies. We are enhancing our marketing efforts to drive more traffic both online and in our stores. With our brand awareness still low and our market share still small, we're well positioned to build on our share gains given the fragmented nature of our industry. The key to our success has been and continues to be our people and the disciplined investments we make across all areas of our business. A bit later, I will touch on several of the investments that are increasing returns and driving growth. To reiterate, our key growth priorities and area of investments are 1, opening new stores 2, increasing comparable store sales 3, expanding the connected customer experience and 4, improving the Coke Pro customer experience. Now let me briefly highlight the progress we made in the Q3 in each of these areas. Number 1, we continue to invest in new store growth, which remains our top priority. We continue to see a path towards at least 400 nationwide floor and decor stores. We have made a number of important changes in the way we invest in and open our new stores. These enhancements along with strong site selections have led to our Class of 16 and projected 2017 new stores 4 wall EBITDA to more than double previous years and are above our pro form a expectations. While our 2017 new stores have collectively not yet cycled past our 1 year anniversary, we continue to believe they will represent the best class of new stores in our history. We opened 7 new stores in the Q3 and remain on track to open 17 new stores in 2018. This represents 20% growth from last year and is in line with our long term targets. We are excited about the class of 2018 stores, including those opened in densely populated metro markets like Long Island, Boston, San Francisco Bay Area and Seattle. We believe these stores will drive substantial growth and profitability over time. Our class of 2018 stores are opening favorably and our work around the class of 2019 stores is well underway. We expect another year of 20% unit growth and this is a direct reflection of the strength and capabilities of our real estate team. Number 2, we continue to invest in driving comparable store sales growth. We remain focused on key comp store sales growth driving initiatives including product innovation, visual merchandising improvements, better training for our associates, pro and designer strategies. We are also focused on investing in technology to provide superior experiences online and in store for both our pro and DIY customers. A few examples of investments we believe will serve the customers better. We are in the early stages of standing up our customer relationship management or CRM solution to smartly identify our customers from multiple sources, which should help us better segment, message and serve these customers over the coming years. We implemented a system for scheduling online appointments with our in store designers. The increase in online appointments has far exceeded our expectations. We know when a customer spends time with one of our designers, they spend far more than our average ticket. We also see both improved customer satisfaction stores and favorable customer reviews on social media when a designer is involved. We are still early in adopting these new solutions to learn and serve our customers, but we are excited with the early results. From a product and merchandising perspective, our expansive SKU offering, visually inspiring design centers and displays along with our breadth of assortment continue to set us apart. This allows us to flex with the ebbs and flows both within and across product categories. An example is our rigid core locking LVP within our LVP laminate category. The same competitive advantages that have led to our industry leading comparable store sales for a decade are clearly on display in this important category. Rigid Core Locking LVP has been our fastest growing product category for 3 years. Our in stock assortment is materially higher than the competition. Our analysis shows that our products are better when compared with the competition when collectively comparing price, thickness, wear layer and warranty. Moreover, we have large visually inspiring displays that show our product on 8 foot by 3 foot display doors, so customers can appreciate how products will look in their homes. We consistently hear from our customers and employees that customers want to see, touch and feel product as well as have someone explain the features and benefits to them. This is an infrequent purchase and customers like help in making the right decision for their project. In short, our entire value proposition is different, hard to replicate and has been working consistently for a long period of time as witnessed by our strong comp store sales growth over the past 10 years. Next, we continue to invest in expanding the connected customer experience. Sales originating through our website continue to grow at a much faster rate than our total sales growth. Online sales accounted for over 8% of our total sales in the 3rd quarter with over half of all of our web traffic coming from mobile. About 75% of our e commerce customers pick up in store, which demonstrates the synergy between our physical footprint and e commerce business. We expect continued expansion of our store footprint to be a key driver of e commerce growth. Recently, we made investments in machine learning on our website to help customers better identify products they are looking for, thereby improving their online shopping experience. We launched a redesign of our mobile website and a new tool called My Project. This allows associates to build orders in the aisle with a customer, which helps our customers to expedite the checkout process. Alternatively, we can email the order to our customers so they can evaluate, change and transact on our website in the convenience of their home or on their mobile device. It is important to note that 70% of customers who ultimately buy from us will visit our website during the buying process. It is critical that our site is informative, inspirational and offers customers the ability to shop floor and decor however and whenever is convenient for them. We continue to invest in the Pro customer experience. We completed the rollout of our Pro Premier Rewards loyalty program company wide and believe over the long term it will generate a greater share of wallet and build loyalty with our Pros. We have received very positive feedback. We tested and tweaked the solution for over 2 years to get it right and we believe our Pro Premier Rewards program is an industry leader. We saw a favorable lift in sales in 2 different test environments in Phoenix and West Florida. Also for PROS, time is money and we have improved our pickup time to approximately 16 minutes, a substantial improvement from a few years back. We now have technology in all of our stores and training to help our stores understand how to safely and quickly get our customers through the checkout process. Now I want to take a minute to address tariffs. Our experienced merchandising team has made meaningful strides in mitigating the risks of the imposed tariffs that were recently announced. Our strategy involves 3 distinct initiatives. 1st, we immediately began negotiations with our Chinese vendor partners and have made substantial progress in lowering the cost of the goods we purchased from them. 2nd, we continue to make progress to diversify the country of origin from all products where it makes sense to do so. This will happen over time. Finally, in areas where we're not able to completely offset the increase in tariffs with cost reductions, we will judiciously adjust retail pricing with a focus on achieving our overarching objective of maintaining our strong and competitive value proposition. In summary, we continue investing back in the business to provide both our customers and professional customers a truly unique customer experience. We remain focused on multiple areas across the business to support our growth and drive returns higher. We have a long and attractive runway of growth ahead of us. We believe we will continue to gain market share as we leverage our winning retail formula of growing our store base 4 times across the U. S. I now would like to turn the call over to Trevor Lang, our CFO and Head of Pro Services to go over our financial results and guidance. Thanks, Tom, and good morning, everyone. I will review our Q3 2018 results and then discuss our outlook for the remainder of fiscal 2018. We delivered another very solid quarter, opening 7 new stores, entering 6 new markets, continuing our track record of growing adjusted EPS at a faster rate than sales growth, while continuing to make important and significant investments to support our sustained long term growth. Our new stores continue to perform very well and are providing a great return on investment and our comparable store sales growth and our new stores in densely populated markets are outperforming the chain average, which is encouraging as we open more stores in the Northeast and the West Coast. Net sales in the Q3 of 2018 increased 26.7 percent to $435,900,000 from $343,900,000 in the Q3 of 2017. We ended the quarter with 95 total warehouse format stores, an increase of 15 stores or 18.8% versus the year end of the prior year period. Our Q3 comparable store sales increased 11.1%. Our comparable store sales growth were driven by transaction growth, partially offset by a slight decrease in average ticket. We estimate that our Q3 2018 comparable store sales growth, excluding the stores impacted by Hurricane Harvey and Irma would have been approximately 10%. Now on to profitability. Gross profit increased 25.1 percent to $179,200 in the Q3 from $142,500,000 in the Q3 of fiscal 2017. Gross margin decreased by approximately 50 basis points to 40.9% from 41.4% in the Q3 of fiscal 2017. Year over year decline in gross margin rate was primarily due to higher domestic freight costs and higher inventory shrink. As a percentage of sales, total operating expenses declined 10 basis points to 33% compared to the Q3 of 2017. The 10 basis points in year over year decline was driven by our general and administrative expenses, which are our store support center expenses typically incurred outside of our stores. We slightly deleveraged our store expenses due to opening 15 new stores since the Q3 of 2017. Our comparable store sales continue to demonstrate solid operating expense leverage of approximately 90 basis points in the Q3. As previously discussed, we are opening new stores in new more densely populated markets that have a higher pre opening and operating costs. For fiscal 2018, we expect an increase of over $10,000,000 in store operating and pre opening expenses compared to fiscal 2017 given our entry into these new more densely populated and expensive markets. Operating income increased 19.7% during the 3rd quarter to $34,200,000 as compared to $28,600,000 in the Q3 of fiscal 2017. Operating margin decreased 40 basis points to 7.9% versus the prior year period. Our interest expense in the Q3 was $2,200,000 compared to $2,600,000 in the prior year period. The decrease in interest expense versus last year is due to a combination of debt pay down and a decrease in average interest rate year over year. Our reported provision for income taxes for the Q3 was $5,500,000 or an effective tax rate of 17.1% compared to $2,700,000 or 10.5 percent effective tax rate in the Q3 of 2017. The increase in our effective tax rate was primarily due to the recognition of excess tax benefits related to stock options exercised in the prior year period. We have adjusted the stock option benefit out of our calculation of adjusted earnings today. Before I discuss net income in 2018 guidance, please note that I will discuss both GAAP and non GAAP measures. As described in our earnings release, we believe our non GAAP disclosures enable investors to better understand our core operating performance on a comparable basis between periods. A reconciliation of these non GAAP metrics to their most directly comparable GAAP financial measures can be found in our earnings release issued in connection with this call. Adjusted net income and adjusted diluted earnings per share were $25,500,000 or 0 point 24 dollars per diluted share for the Q3 of 2018 compared to $17,300,000 or $0.17 per adjusted diluted share in the Q3 of 2017. This represents an increase in adjusted net income of $8,200,000 or 47.2 percent compared to the prior year period. Adjusted EBITDA for the Q3 increased 23.2 percent to $48,900,000 compared to adjusted EBITDA of $39,700,000 in the Q3 of fiscal 2017. We ended the quarter with $190,000,000 in cash and available liquidity under our revolving credit facility, dollars 150,000,000 of borrowings outstanding and no revolver debt. Our inventory balance at the end of the 3rd quarter was $403,800,000 down $24,200,000 from the end of fiscal 2017 up 2% versus the Q3 of 2017. Now turning to our earnings guidance. As you saw in our press release, given our year to date performance and our expectation for Q4, we are raising the low end of our full year sales range, reiterating our full year comp and adjusted earnings per share outlook and trimming our full year adjusted EBITDA range by a little over $1,000,000 Versus the annual guidance we gave on our last call, fiscal 2018 gross margin stayed consistent at an estimated 41%, store operating and preopening expenses are slightly favorable, but we are taking on an additional $1,000,000 in cost as we work towards Sarbanes Oxy compliance this year. We expect Q4 fiscal 2018 net sales to be in the range of 429,000,000 dollars to $437,000,000 which represents a 10% to 12% growth from last year. This 4th quarter outlook contemplates comparable store sales that we've flat to up 2% from last year. Recall comparable store sales increased 24.4% last year in the 4th quarter as our sales in our Houston market increased over 100% due to Hurricane Harvey. Our Houston stores alone accounted for 800 basis points of the 24.4% comparable store sales increase last year. As we built our guidance for the Q4 of 2018, we are assuming our Houston market stores experienced a comparable store sales decline in the mid-forty percent range, which is modestly higher than our previous expectations. We estimate that our Houston market will create a 900 basis points headwind on our Q4 2018 projected comparable store sales growth. Importantly, we expect our non Houston comparable store sales to remain strong and grow at an estimated 9% to 10.5%. Our Q4 outlook also assumes a year over year decline in operating margin rate of over 200 basis points due to the following factors in priority order. 1st, higher new store preopening expenses, which is planned to be approximately 7,500,000 dollars versus $2,700,000 last year. 2nd, the deleveraging of our store operating expenses by over 100 basis points due entirely to new stores as well as the natural deleveraging that occurs when comparing against a Houston led 24.4% comp last year. And finally, an expected decline in gross margin due to higher domestic supply chain costs and higher shrink and damage. As a result of these factors, we expect adjusted EBITDA for the Q4 of 2018 to be in the range $40,300,000 to $44,200,000 versus $43,500,000 last year. Adjusted diluted earnings per share for the Q4 of 2018 is expected to be in the range of $0.16 to $0.19 versus $0.19 last year. This assumes approximately 104,800,000 weighted average diluted shares outstanding for the Q4 of 2018. For the year, we expect sales to be in the range of 1,702,000,000 to 1,710,000,000 increase of 23% to 24% from fiscal 2017. This outlook is based on 17 warehouse store openings or 20% new store growth and an assumed comparable store sales increase of 9% to 10%. Excluding Houston, we expect our comparable store sales to be approximately 10%. We anticipate fiscal 2018 adjusted EPS of $0.93 to $0.96 an increase of 35% to 39% over fiscal 2017. Diluted weighted average shares outstanding are estimated to be approximately 104,800,000 and our fiscal 2018 normalized effective tax rate is estimated to be 23.4% for the remainder of the year. As a reminder, this guidance does not consider the tax benefit due to the impact of stock option exercises that may occur in fiscal 2018 or possible discrete tax adjustments. We expect fiscal 2018 adjusted EBITDA to be in the range of $188,000,000 to $192,000,000 an increase of 18% to 21% over fiscal 2017. CapEx for the year is expected to be in the range of $161,000,000 to $167,000,000 in total with $103,000,000 to $105,000,000 of this capital budget being spent on the 17 new store openings in 2018 as well as the construction of stores opening in early 2019. Dollars 33,000,000 to $35,000,000 is earmarked for store remodels, including one relocation in our distribution centers. The remainder of our CapEx approximately $25,000,000 to $27,000,000 is directed towards our IT, e commerce and other store support center initiatives. We signed a new lease for our store support center, which is located only a few miles away from our current store support center. We are still evaluating our options related to our current store support center. If we decide to exit our current lease, we can incur unique lease exit costs of up to $10,000,000 Our intention would be to call these costs out in our reconciliation of non GAAP metrics in our quarterly earnings release, so there would be no impact on our adjusted earnings. We are still in the planning process for 2019 and consistent with last year, we plan to discuss our projections for 2019 when we have our year end earnings call in late February next year. With that operator, we'd like to turn it over to the Q and A portion of the call. Thank Our first question comes from Seth Sigman with Credit Suisse. Please proceed with your question. Hey, good morning guys. Thanks a lot for taking the question and nice quarter. My first question is just around the tariffs. And Tom, thanks for the color on how you're planning for that. But just wondering, how do you think about your ability to pass through pricing, while still maintaining the price leadership in the category that's worked for so long? Do you see your competitors looking to pass through pricing also, giving you room to also take up pricing if you need to, while still maintaining the price gap? Or do you ultimately see that price gap narrowing? While our goal is to maintain the price spread that we've enjoyed during the time here, if you think about the market and kind of the way people buy, a lot of the market is independent hard surface flooring stores, which are already buying through middlemen. And if you and then certainly the home improvement centers. But our philosophy has not changed. We buy direct from the source and a big part of buying direct from the source is taking the middlemen out. So now tariffs could mean that the best source is not always in China. So I'll let Lisa talk a little bit about where we're moving. But from a price perspective, we've really been thoughtful. We go through and we try to really look at where the product originates from. And in some of our products, the same situation is going to exist across everyone who sells that product because the only place you can get it is China. And those are the type of products that we'll look at. But we're a value retailer first and we will do all we can to maintain the price spread that we've enjoyed. We think that's led to a lot of success. I would add one thing to it Seth and that is when you look at a total flooring project, if you kind of deconstruct a flooring project and you look at how much of it is the SKU that's coming from China versus how much of its installation accessories, which are domestic versus how much of its labor. The real impact even with the 25% tariff is still mid single digits to the end user who's doing a flooring job. And have you guys embedded any sort of impact on sales or margins for the Q4 as it relates to tariffs? And then just ultimately, what is going to be the net effect of all these initiatives, all the planning you're doing around tariffs in terms of the impact it could have on sales or margins, I guess, under the 10% scenario and then under the potential 25% scenario? Hi, this is Lisa. I'll speak to the 10% scenario, just the Q4 that's right in front of us. So we have adjusted a few prices, not a lot, but we don't believe that the 10% tariff that we have been seeing since September 24th will have any impact on the margin for the Q4. As we get into the 25%, I'll let Trevor speak to that a little bit more. Yes. I do think we will not have much of an impact in the 4th quarter is how we've modeled it. Lisa's team has done an incredible job and being aggressive with our partners to get lower costs as soon as the tariffs were announced. And also our inventory run our weight average costing inventory system and because our inventory turns about 2 times a year by the time some of those costs bleed in, it just won't have much of an impact. As we look forward to 2019, we're not going to really give guidance or talk about that in detail. But our plans are to work through the 3 initiatives that Tom mentioned, right. We are going to aggressively take out costs with our vendors. We are going to look at sourcing products elsewhere where it makes sense. And then the last resort is we will raise prices to the extent the market will bear it. Yes. I just would say one thing. The raising price is the last resort. Our merchants have done if you think about our category or our company, we have a lot of merchants dedicated to hard surface flooring. We have a sourcing office. And step 1 is negotiate with the supplier. And our partners have been with us a long time. And we've been very fortunate that we've been able to negotiate a lot of cost out to help us. So wouldn't get so caught up that we're not offsetting tariffs completely with price. It's just something that it is a lever that we'll look at. Understood. Thanks very much. Very helpful. Our next question comes from Matt McClintock with Barclays. Please proceed with your question. Hi, yes. Good morning, everyone, and congrats on the pretty impressive comp on difficult compares. I was wondering just as a follow-up to the last question, you said that a 25% tariff would drive a mid single digit increase in the total job cost. How does that compare with just how labor inflation over the last several years has driven the cost inflation for the total cost of doing a flooring project? This is Trevor. When you look at the overall total cost, Lisa's team has done a great job analyzing this for us. It's mid-thirty percent is the actual cost of the product itself that goes into it. You then have to have all the insulation accessories, underlayment, grout, thinsets, mortars, sealers, things like that. Most of those things are sourced domestically. And so we won't have much of an impact there. And it's rough math, but approximately the cost of the product per square foot, let's say you put in tile at $2.50 a square foot, you're getting another $2.50 a square foot for labor. And so maybe half the cost is the labor. We don't control the labor, but we frankly have not seen massive increases, really significant increases in the cost of install per square foot. It's still a competitive environment. The pros are having to compete from business. And so I do think there will be an increase in price a little bit as Lisa said even at a 25% tariff if we didn't do anything the overall impact is about 5%. We do think that there will be some slight increases there, but we have not seen to date significant increases in labor from the pros that we talk with. Yes. And if there has been increase in labor over the last few years, it hasn't affected us. Okay. That's helpful. And then just we've heard across the industry that there seems to be a broader shift or a broader trading downtrend within flooring to date. And I was just wondering, when you think about your business, how it's positioned in the value channel and the results, the strong results that you put up this quarter, could you talk to your thoughts on how much your business is benefiting from this broader trading downtrend that we're starting to see? Yes. This is Trevor. Lisa just handed me another. Our better and best products are increasing as a percentage of our total sales. I think what you're referencing is the product attributes that have come out, we'll just pick up a high growth department, as Tom said, for the last 3 years as our rigid core LVP. That can be a less expensive product relative to higher end wood, for example, or higher end wood look tile. But when you consider the overall install cost per square foot with installation accessories, the overall retail per square foot is not meaningfully different and the overall gross margin profile isn't meaningfully different. And evidenced by that, if you look at our comps for fiscal 2017 and look at our total sales and comps for fiscal 2017 2016 that also was our best performing department at that time. Our comps were fantastic. Our gross margins were good as well. And so our view is as long as the hard surface flooring market is growing, we're going to have the best products and we're going to continue to lead with both sales and productivity. And I just would add quick two quick points. One is when you peel apart our numbers are better and best SKUs are comping better than our good SKUs. So we're not seeing consumers step down and the benefit of our model is that our store can flex to whatever selling in the store. So we react to that on a local store level. Perfect. Thank you very much. Our next question comes from Elizabeth Suzuki with Bank of America. Please proceed with your question. Great. Thanks. Just laminate and LVP has gone from about 12% of sales in 2016 to now running at about 18% of sales year to date. How high do you think that ultimately gets? And do you view that as a net positive trend as a retailer? Or are there product categories that aren't growing as fast that would typically generate higher margins for you? Yes. So that category for the 3rd year in a row continues to do really well for us. As I said in my pre prepared remarks, all of the competitive advantages that we have across the categories we sell in the store exist within this category. For us, we've got initiatives in place. When I talked in the last call, I talked a little bit about the total sale. And if we don't attach all of the attachments that go with it like molding and paper barrier and things like that of that nature, then the margin can be a bit challenged, not a lot, but a bit. But we've made good progress in the last quarter and we've got initiatives in place to narrow that gap. So for us, whatever the customer wants, our stores are we've got a unique culture here. Our stores are merchandised at the local level and we have teams in place that flex the space in the store. So if that continues to increase, that's not a bad thing for us. Great. And then last quarter you guys had mentioned that you saw that slowing existing home turnover might be a pressure to the business over time. And one of your large retail peers mentioned that strong home price appreciation is a positive offset to that pressure. Do you think flooring is the type of category where homeowners are more likely to undertake that project when they're moving into a new home? Or does turnover not necessarily have as big of an impact as like rising home price appreciation? I mean, we always cite that housing turnover helps. We always cite that rising housing value helps. People will invest back in their homes as they go up in value. I think they're both important to us. But we're not economists and what happens in the markets happen in the markets. I just pivot back to as our company continues to grow, we continue to take share. Our unaided awareness is less than 10%, 44% of our stores are less than 3 years old. Hard surface flooring is growing faster than carpet. Innovation across the category has driven sales. So whatever the market does, we think we can take share and outperform what's happening within the market. Great. Thank you. Our next question comes from Michael Lasser with UBS. Please proceed with your question. Good morning. Thanks a lot for taking my question. I know it's early and you're hesitant to provide any outlook for 2019. But just directionally in light of all the uncertainties with housing, tariffs, the competitive environment that seems to be becoming a little bit more intense, Do you think you can keep your margins flat in 2019? We're not prepared to talk about 2019 at this time. Okay. And presumably, part of the reason why you're getting better deals from your vendors because the move in the RMB. If the RMB were to reverse, would you have to give back some of the advantageous purchasing that you've gotten from them? No. This is Lisa. We certainly don't think so. That is certainly helping the negotiations. But the bigger thing that is helping the negotiations with us with our Chinese suppliers is that we have really great long standing relationships with these guys and they don't want to lose this business. They see the growth opportunities that we have as a company. They see where their business could be with us in 5 years. And so they're finding ways to be more efficient. They're finding ways to get us to cost that we need so that we can continue to be competitive. So I don't believe that would help me. Certainly, we keep our eye on currency. We do pay in U. S. Dollars, and it's helped over time, but I would not say that it's that we would anticipate that happening at all. And Michael, go ahead. I just want to go back to one thing just because I was kind of we're not ready to talk about 2019 and we're not. But I would just say that 2019 is a moment in time for a company that's growing like ours. We're still 20% to 25% of what we can be. We still believe we can have more than 400 stores. There's nothing changed in our confidence. We'll open up 20% new units next year. We'll continue to invest in the business, but we just don't have the detail yet on 2019, but we'll get to it. What would you say Tom to those who argue look, 4 to 4 is really made its niche on direct sourcing inexpensive products in China being able to sell below competition and building that around really impressive store experience. If the 25% tariffs go through, even if the tariff doesn't stand, remain in place for a while, does that significantly impact the floor and the core business model? No. As I said earlier, I mean, when we talk about look, we buy from more than just China, right? So we buy from 20 countries. We have 2 25 suppliers now around the world. And we'll continue to diversify where we buy from. Our goal has always been to go where we get the best price so we can pass it along to the consumer. And when you think about the supply chain, particularly that the independents have to deal with, there is a distributor in that there's multiple hands in the margin slice because they don't they're not able to buy direct. We have a team in place to be able to buy direct from wherever is the cheapest in the world. So I don't believe that tariffs will are going to change the way that Floor and Decor does business and what our competitive advantages are. Michael, this is Trevor. Just one last thing. Lisa's team has done a pretty exhaustive study of where we believe our competition is getting their products. And because we direct source, we are very transparent that about half of what we sell comes from China. But as we've looked at the competition, both the big box and the independents, we believe a lot of what they're buying as well is coming from China. And so everybody's going to have to deal with this. Don't think of this as such that it's very disproportionate to floor and decor because about 50% of what we buy, we think a lot of what our competitors are buying is coming from China as well. Thank you very much. Our next question comes from Christopher Horvers with JPMorgan. Please proceed with your question. Thanks. Good morning, guys. Two questions on the hurricane. First, as you think about the new outlook for the Q4 up in terms of the impact, could you help us through how you think about that in terms of because we're trying to think about the first half of next year where you still have a benefit. Is it that there's more comp dollars that you're anniversarying? Is it that the trends that you're seeing are just are moderating in the Houston market? How do you think about that? This is Trevor. I'll start off. So you guys probably recall from last year, we called out that the Houston market comps up over 100% in the Q4 last year. We thought originally going into this looking at a 2 3 year trend, when we looked at Ike a decade ago, we thought maybe that would comp down in the negative 35%. We were incredibly accurate in our forecasting for the 1st 9 months of the year. As As we got to the Q4 and we saw the actual results, it looks like it's going to be more like the mid-40s. And so we're just obviously updating you guys. We do think as we get into the first half of next year, there will be continued headwinds in Houston, although albeit a lot less than what they are now. Houston comp, I think up 60% in Q1 and I think maybe up 40% in Q2. So they will abate the first we go along. And so I do think we're not ready to give guidance for next year, but I do think when we ultimately roll up our guidance mathematically, our comps will accelerate throughout 2019 for 2 reasons. 1, we will not be going up against the Houston headwinds. And 2, as you looked at the cadence of our openings of our stores this year, they're very back end loaded again. And as those new stores come into the comp base, they still provide a substantial comp lift. And because we'll have more of those new stores coming into the comp in the back half of twenty nineteen, we should have higher comps as we get to the back half of twenty nineteen. Understood. That's very helpful. So in terms of the Q3, you had talked about 150 basis points to 180 basis points potential sort of tailwind from the 2 hurricanes in September. So it seems like you ended up at the sort of the low end of that range. Is that fair? Yes. I think we called out in my prepared comments that if you excluded both Hurricane Harvey in Houston, Hurricane Irma in Florida, we think had about 110 basis points impact to the business. So the 11.1 comp that we actually performed at would have been closer to a 10% comp. Got it. And then can you talk about just the overall category trends? Appreciate that the customer continues to trade up and clearly an encouraging sign. So how did sort of luxury vinyl versus natural stone and tile and porcelain and so forth? Thank you. Sure. So I mean for the 3rd year in a row, luxury vinyl has been one of our fastest growing categories. It's that customer we believe is shifting a little bit from certainly from the wood categories the most, a little bit from tile maybe, but that's it's kind of hard to know where they're shifting from. But our strength continues to be in the laminate and in the vinyl products more than and decorative accessories and regular accessories. All have been strong for us. So it's a wood is a little is a challenge for us, but we again we think that's a shift in customers, Chris. And stone has been a challenge. That's softness in travertine to a certain extent and customers shifting to porcelain tiles. Thank you. Thanks, Chris. Our next question comes from John Matuszewski with Jefferies. Please proceed with your question. Great. Thanks for taking my question. I guess to start off, so clearly the unit growth is still intact and comps are really robust 25% to your stack this quarter. Could you just spend some time elaborating on that productivity opportunity ahead? I think that's probably underappreciated. And I know you mentioned the loyalty program, better scheduling of designer appointments. What levers are you guys most excited about? And what other levers do you think could be pulled in the coming quarters to drive sales per square foot? Yes. I'll talk about the productivity first. I mean, I think our average sales per square foot today is somewhere in the, I think, the $2.70 range. If you look at our best 20% of our stores, they're close to $400 So we've got substantial upside in the sales productivity per store. As Tom mentioned, over 40% of our stores are less than 3 years old. Our new stores tend to start at a slightly lower volume, but as we get better brand awareness, more pro shopping with us, people understand what we're trying to accomplish. We see substantial comps from our new stores that's been as high as a 400 basis point lift to our total comps comes from our new stores. So we think there's plenty of productivity. We are always making enhancements the way we handle with technology, the back end of the store, technology actually help our sales associates, the website, all of those things also help our productivity. And so we think there's substantial upside to the overall productivity per store and through our website as we look to the future. Yes. And I'll talk a little bit about some of the things we're excited about. You mentioned and I mentioned a lot of them in my script. But there's too much to list of things that we're working on and things that we're doing. But I'll just talk about 4 quickly. Our emphasis on the designer part of our store, over the last few years, we put in design centers with all the stores. They're almost 2,500 square feet in size on average. We've got some bigger and some smaller. But we're we have spent a lot of time upgrading our design services and what our designers' capabilities are. And that is a big initiative that we'll talk more about as we get into the next couple of years. But certainly, we're that is a big initiative that we'll talk more about as we get into the next couple of years. But certainly we're excited about what they're able to deliver. We're giving them great tools and we're investing in them. And we feel like we know when our designers are with and with a customer, the average ticket is much larger than our normal average ticket. We know that they sell the whole project. So we're excited about that. We're still in the middle innings of what we can do with our professional customers, while we've done a lot over the last 5, 6 years. As evidenced in this quarter, we finished rolling out Pro Premier. We finished rolling out a Pro App that's getting great reviews. We're enhancing our delivery capabilities, but we're still we can still be a lot better. We're excited about that will bring us. And then we have a huge a large initiative around kind of how we sell the customers and what the customer experiences in the store. We've got some pilots underway that staff the store differently than we've historically staffed it. We're excited about that we'll bring. And then the last thing I'd say is that innovation within this category continues to be a driver of business and there's continued Lisa and her team have done a really nice job continuing to find great products and we're excited about the products that continue to come in our store and all of them should be drivers to help us to continue to take share. Great. And then just a quick follow-up. So despite some softer existing home sales data, you guys have been really able to buck the trend and gain share in the industry. Does your data suggest that's continuing to come from those 15,000 independents out there? And then also just anything to call out on regional trend? I'm thinking just given the overall healthy comp number this quarter, it's probably broad based and you could very well be posting some nice numbers in areas where housing may even be a bit softer. So any color there would be helpful. Thanks. So the first part of the question was yes, from a share standpoint, look, we're taking we believe we're taking share from everywhere that we compete. We think we take share from the independents. We take share from big box. And then we think we grow the market to a certain extent. So there's nothing new to report on kind of how we think we grow our market share. And then from a regional perspective, as Trevor mentioned and as I mentioned in my script, if you just minus out the Irma and Harvey impacts, the Irma and Harvey impacts, we're still double digit across the country. So we're seeing good trends. Great. Thank you. Our next question comes from Zach Fadem with Wells Fargo. Please proceed with your question. Hey, good morning guys. Could you talk a little bit about your approach to inventory ahead of the January tariffs? It looks like your inventory levels grew only about 2% in Q3, which is surprisingly low given the new store growth. So maybe if you could talk about the drivers there? And then whether we should anticipate inventory build in Q4 as you look to get ahead of the 25% tariffs next year? Hey, Zach, this is Trevor. Just a quick reminder, last year our inventory was up 47% at the end of the year. We had 2 very important distribution center moves. We relocated our Savannah distribution center in late Q4. We shut down our Miami distribution center in early Q1. And so we really built up our inventory to stay in stock with those 2 large distribution center moves. And because that inventory was so elevated, we just didn't need to make the same level of investment as we got to the end of Q3. I don't want to take away from our inventory team. They've done a fantastic job of managing our inventory to keep us in stock and not grow our inventory. And yes, like every other retailer, we're doing everything we can to bring in as much of our inventory before the end of the year, such that we can assuming those 25% tariffs go into a place that we will receive those. But we still even with that, our current projections are that our inventory at the end of the year will grow at a slower rate than our sales growth. Got it. And then for your Q4 guidance, it looks like you're expecting new store productivity, at least by the way I calculate it, to take a little bit of a step down. I know you're opening some stores later in the quarter. Maybe you could walk us through just the moving parts, whether there any consideration you're giving to the macro or competitive environment perhaps in some of your new markets? Yes. This is Trevor again. It's actually a very simple story, Houston. So we had a new store in Houston that was part of the new store sales last year. And if you go back and look at our Q4 new store productivity, it was the highest it's been. And again, that's a little misleading because one of our new stores was in Houston that its sales went up substantially just like the comp store sales, as I mentioned, were up over 100%. That Houston store comp came into the comp base in Q1 of this year. And so that's what has been indicating that our new store productivity is not as strong. Got it. That makes sense. Thanks, Trevor. Appreciate the time. Thank you. Our next question comes from Steve Forbes with Guggenheim Securities. Please proceed with your question. Good morning. I wanted to focus on the Pro customer and specifically, right, as it relates to the rollout of Pro Premier. Can you comment on the overall acceptance of rewards versus some financial incentive and maybe your willingness right to transition if there is one right to financial incentive over time. I mean what are the pros saying as this program continues to build and you guys build up that customer base? Sure. This is Tom. I will start and then hand it over to Trevor as he is in charge of Pro. So far the acceptance has been terrific. As we approached our Pro Premier program and our so called loyalty program, We approached it with a plan to we treat our professionals like partners. We don't compete with them. We don't offer installed sales in the store. We want them to be our partner. So we approached it from a partnership standpoint. So we have an emphasis on services that a pro can get for their business and we think that's a unique approach to kind of how we go about it. But there is a gift program in there where they can take trips and they get recognized for how much they spend within our stores. And so far the acceptance has been great. Trevor, I don't know if you want to provide more color. Yes. I think Tom hit the point right. I mean it's a dual pronged approach where we offer about 13 different business services things like email, website, lower workers' comp and general liability costs, payroll services. And there's a points based component. The more you spend, the more points. We had a customer take a very nice cruise with us here recently and has got pictures posted all over social media, all of his clients, talk to his clients. And so we think it's a great program. As Tom mentioned, we had we very slow to roll this out. We tested it for over 2 years in 2 markets and saw a nice lift in sales. And so it is an expensive program, but we think there's a good ROI in there. Thank you. I'll keep it to 1. Thank you. Our next question comes from Jeff Small with Citi. Please proceed with your question. Good morning. Thank you for taking my questions. I wanted to ask about expenses. It looks as though you did a nice job controlling costs across both COGS and SG and A in the quarter. With your gross margin coming in better than forecasted despite the product margin pressure and some nice leverage in terms of comparable store operating expenses. I was hoping you could provide some color on the drivers of those results across the two line items. Yes, this is Trevor. The teams did a good job. There's probably nothing more to say about it than that. I think distribution centers manage their costs closely, store operations, we watch their labor every single week. They manage their costs closely especially in the back half of the quarter. All the operating expenses travel across the board. We demonstrate the business. The teams did a good job of chipping in and watching it closely. Terrific. Thank you for the color and best of luck in the Q4. Thanks, Jeff. Our next question comes from Charles Grom with Gordon Haskett. Please proceed with your question. Hey, thanks. Good morning, everybody. Just a question on the consumer. We just got off the Wayfair call and they talked about a little bit more of a volatile market and some opaqueness in the consumer backdrop. Just wondering if you're seeing any of that in your business? I presume no given the guide. And then just one quick one, if you could just maybe hold our hand on gross margins for the Q4? Thanks. I'll do the consumer first and kind of pivots back to what I said. I mean, what we look for in our businesses, we look around where housing markets would slow quicker, California, Phoenix, Vegas, etcetera. We're not seeing weakness there. The other part I would say is that our transactions actually out. If you took Houston out, our transactions accelerated during the quarter, so more customers are coming into the store. So the consumer may be pinched, but we have a disruptive model that takes share. And as I said earlier, 44% of our stores are less than 3 years old, 10% unaided brand awareness. We think people are finding our concept and it resonates with them. So even if the consumers pinched, we think we can perform through that. Yes. This is Trevor. The only other thing I'd say is my experience in retail is when things get tighter, the value player takes market share. And we certainly experienced that in 2008 and 2009. Business is very different than it was 10 years ago, but I do think we will take more market shares if the market continues to it's doing well, but if it continues to decelerate. Specifically on Q4 gross margins, we are planning them down some portion of 70 basis points. As we mentioned, we think the teams have done a great job on tariffs. We don't think most of the margin deceleration in Q4 is much different than what we've talked about for the year. Most of that lower gross margin is coming from product margin, which we believe is mostly attributed to higher domestic supply chain costs. As you guys know, trucking costs are higher, fuel surcharges are higher, and that's the majority of the gross margin decline that we're seeing as we get into the Q4. Great. Thank you very much. Our next question comes from David MacGregor with Longbow Research. Please proceed with your question. Yes. Good morning. Congratulations on all the progress. Just wanted to talk about the experience in some of these more densely populated urban markets that you've been moving into recently. It sounds like things are going well. But can you talk about maybe where things are you may be a little surprised? Are you seeing things that you didn't quite anticipate? And what you've learned from that and just how you might tweak the model going forward as a result of that experience? Yes. This is Tom. They are going well. We're pleased with our entrance into Boston and into Seattle. What we do resonates there. We've been in bigger markets. We've been in New Jersey and Washington DC for several years. And we're really excited about the performance of those markets and kind of how they've ramped since we've opened them. It's been pretty substantial and we're anticipating similar things to happen in those markets. I don't think there's much we change at this point. We've got a good real estate strategy in those markets. We're going to infill those markets at a pretty nice rate. But they've opened up as we'd expect and we're fortunate to get a lot of people to attend our opening events and find the brand and it's resonating. So we've learned a lot. We've opened a lot of stores in the last 6 years. So we think we've we certainly have the strategies in place to have successful openings no matter where they are. Yes. And if you look at the this is Trevor. If you look at the comps in those stores in Washington, D. C, New Jersey, Los Angeles, in their 2nd 3rd years, they're incredibly encouraging as we think about the comps for the 2nd 3rd years as these stores and these newer densely populated markets comes into play over the next few years. Thanks. Our next question comes from Seth Basham with Wedbush Securities. Please proceed with your question. Thanks a lot and good morning. My first question is around product mix. Last quarter you called about product mix being a negative impact to gross margins. How is that this quarter and what's your expectation for the next couple of quarters? Yes. I think this is Trevor, Seth. We've done some more exhaustive studies of that mix. And the overall margin impact for the back half of the year, we think has more to do with the overall higher supply chain costs. As you look at the total mix of what we've sold, where we've adjusted retails and the costs that we've obtained, we don't see mix being as much of a headwind as we think about the back half of the year. And I would say that rigid core vinyl is what we talked about in the last call and we've got initiatives in place to do a better job of selling in the store the whole project and we've seen progress in that. That's good. And my follow-up question, if I may, related to the tariffs. So you guys have done a great job offsetting some of the 10% tariff that we've seen thus far with reduced price from vendors, currency and shifting sources. How much do you think you can offset in the case of 25% tariff? We're working on that and we're not we're our goal is to offset as much as we can. We're anticipating that that happens. We did a good job of going through and buying Chinese New Year orders early. And we will continue to we're back working with our suppliers right now in anticipation of that happening and we'll try to continue to take cost out. And we will continue to diversify where we go to get our product. We've got lots of things underway. We'll talk more about that as we get into 2019. But our goal is to if the tariffs go through is to diversify outside of China and we got plans in place to do that. Fair enough. Thank you. Our next question comes from Peter Keith with Piper Jaffray. Please proceed with your question. Nice execution here. I wanted to dig in a follow-up to Seth's question on the mix. So the topic last call was a lot around the mix shift with LVP and maybe losing some of the accessory sales. That mix seemed to accelerate rather meaningfully in Q3, but it sounds like mix isn't as bad as you thought on a gross margin standpoint. So just following up on that, can you give us a little more specifics so we can understand what's happening and presumably that mix shift is going to continue in the coming quarters? So, Yes, this is Trevor. Peter, I think when we have had a mix shift, but again, we are continually evaluating costs and retails within those. And as we've evaluated those things, we've gotten a good done a good job on cost and we've also adjusted some retails. And so as we've now done all of that work, we have affected that and that's reflected in the guidance we've given and what happened in Q3. I think from a mix standpoint though, it's not it is not a pricing thing. We have done a much better job, Peter, over the course of this quarter and raising the training level within our associates of what they need to sell when they sell rigid core locking vinyl. And it's been growing at a really rapid rate, but there's some products that a customer has to have when they walk out of the store. And quite frankly, we can execute better. And we did execute better in the Q4. I think that will continue to happen. The other thing that I would say is as that mix has continued to grow, when we offer if you look at just rigid core locking plank, our stores have hold on, I'm getting to the number. I mean, we have close to 50 SKUs available. And Lisa's team has done a good job of bringing better and best into that category. So we're not just selling off of the low price points that the big boxes may carry. We're able to sell a better product that comes with a little bit better margin. And we think between our initiatives around selling the whole job and our initiatives around selling better and best in that category that we can offset any challenges that we may have. Okay. Great feedback. Thanks a lot guys. Good luck. Our last question comes from John Bald with Stifel. Please proceed with your question. Thank you. And my congrats on the share gains. You mentioned judicious pricing and I guess through either walk in competitor stores or technology or both, you can see what competitors are doing daily, I guess. I'm curious on those imported tariff affected products, what you've done versus what your competition done, if you're able to give us any kind of early read on that front? Thank you. This is Trevor. Yes, I was just saying, you haven't seen a lot so far. I think we are again, on the cost side, we've been very aggressive and we've taken cost out to offset that. But we have not nor have we seen our competition do a lot so far with significantly affecting retail. So I think as those again as that product starts getting received in the ports and it's going into ours and our competitors' cost, there will likely we expect to be some retail impacts. The majority of our offset on the imposed tariff now is on cost negotiations. So we keep a close eye to the competition. As you know, this category is a bit different. There's not a lot of brands in this category and features and benefits are different within products. So we do our best to monitor how we are pricing. We feel confident within our pricing. Thank you. Good luck. Thank you. At this time, I would like to turn the call back over to Tom Taylor for closing comments. Well, I just I appreciate everyone's interest in joining our call today. I want to again thank all of our associates for the hard work. It was a tremendous quarter. We are really excited about what the future will bring. We're in the early stages of what Floor and Decor can be. So we look forward to talking to you on the next call. Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation.